Jozi Angels Syndication Process
In our previous blogs we gave you an overview of the syndication process and followed this up by discussing the role of a lead investor in a syndicate. In this blog we present you with an overview of the syndication process at Jozi Angels. Sit tight as we walk you through the various stages, starting from the deal origination right through to the post investment activities. As we unpack the investment process, you will gain a sense of the thoroughness and robust nature of the process.
There are 3 types of angel investor networks, namely a fund network, manager led network and a member led network - the type of network informs the investment process. You can think of these three types of networks in terms of a spectrum. The spectrum relates to the members’ engagement in the process: in a fund the engagement is low, in a member led network the engagement is high with the members doing a lot of the heavy lifting and finally somewhere in the middle is a manager led network, where the members’ engagement is moderate. Jozi Angels is a manager led network. We operate on a syndicate basis where the members opt in to investment opportunities.
In terms of the syndicates, we strive to work towards an optimal number of investors, that is 4 to 6 members. As mentioned before, angels bring 3 things to the table: knowledge, networks and capital. With regards to the non-financial value an angel brings (knowledge and networks), these top out in a group of this size. In addition to this, a group of this size allows for efficiency in the deal management process and an acceptably clean cap table. This last point becomes particularly important for coherence in the corporate governance process and something that later-stage investors will consider before making an investment.
In light of the investment model, we have a core team that does all the heavy lifting with syndicate member touchpoints at various stages for input from the investors. Investor touch points are indicated in coloured text in the image below.
Discussed below is our deal process with reference to 6 high level elements:
1) Deal Origination
To source potential investment opportunities, we have created an easily accessible application form on our website where startups can apply for funding. The application form asks a series of questions which allows the deal sourcing team to assess the desirability, viability and feasibility of the opportunity.
The team then makes contact with the startups that they deem to carry potential before making the opportunity available to network members. It’s at this point network appetite is analyzed and the syndicate process begins in earnest.
Separately, the team also receives referrals from other networks and later stage investors.
Before committing to the deal, interested angel investor have a meet and greet with the founding team. After introductions and an update on the business from the founding team, each investor is able to ask questions to provide more colour on the business. Once each member has sufficient comfort on the investment opportunity they will give us a green light and place a deposit to proceed with the investment.
3) Term Sheet
The term sheet shows the high level terms and conditions for the investment. This segment of the process involves the negotiation between the Jozi Angels team and the startup. This usually involves a series of back and forth and is often the time when deals break down. Its for this reason the negotiation is done before the due diligence process.
The investment contingencies such as the team’s involvement, use of funds and strategy are also stipulated in the term sheet. While the term sheet is not legally binding it gets all parties on the same page.
4) Due Diligence
Our process involves a technical assessment, legal review and commercial interrogation as well as site visits and a team assessment. We currently outsource the due diligence to third parties.
The purpose of an early-stage due diligence is to identify any material risks, confirm the accuracy of the information provided by the startup and highlight any investor blindspots. We aim to conduct this within a two week window to ensure deal momentum.
5) Legal Agreements
After the parties agree on the details laid out in the term sheet, a binding agreement is drawn up. The agreements depend on the type of investment. Where the round is an equity investment, this will involve a Shareholders Agreement and possibly an update to the Memorandum of Incorporation (MOI). The MOI is a public document which takes precedence over the Shareholders Agreement should there be an inconsistency.
In addition to this, an investor will also be party to a Subscription Agreement in an equity deal and a Note Purchase Agreement when a convertible note is used. Since we operate on a syndicate basis, a Syndicate Agreement will also be put in place.
Lastly, there may be submissions that need to be made to the Companies and Intellectual Property Commission (CIPC) in the event of an update to the MOI and change in the list of directors as well as a submission to South African Reserve Bank (SARB) in the event of an international investor participating in the syndicate.
6) Post Investment
After the investment, we stay involved with the objective of building value in the business. As private equity investors, we strive to de-risk the business by participating strategically in opening doors and in decision making. This is done by holding regular meetings, sharing knowledge and ensuring that contingencies are met.
As an angel investor network we've worked to reduce the deal friction from origination to post investment. We also recognise that timing is essential. Every element in the process is significant and has proven to add value to the assessment and finalisation of deals.